Tax changes to encourage savings

Finance minister Michael Cullen says that he is open to suggestions on how the tax system can be used to better encourage retirement savings.

Wednesday, June 20th 2001, 11:36PM

In last month's Budget I announced that it was time to start moving towards reforming the rules on the taxation of savings for retirement through private superannuation schemes. Therefore I had instructed officials to work with savings industry representatives to report by the end of the year on ways to lift private savings.

My thinking so far has focused on two main approaches. One is to introduce a tax incentive at the contribution level, providing savers with an immediate pay-off. The other is to defer taxing the earnings made by a fund until withdrawal. However, I am open to considering alternatives to these approaches.

In developing policy to increase savings by means of tax incentives, several important issues must be considered. There is the incentive itself: if you are going to provide one, where will it work best? Then there is the need to minimise fiscal risk and the question of maintaining neutrality between different types of financial products.

As the first step in the process, officials will be consulting informally with various members of the savings industry to canvass views on options for increasing savings.

I shall conclude by updating you on the Trans-Tasman triangular taxation issue. There has been some progress towards resolving the longstanding problem of the taxation of triangular investment between Australia and New Zealand.

Triangular investment occurs when an Australian or New Zealander invests through a company resident in the other country that earns income in the country of the shareholder.

The taxation problem arises because Australia and New Zealand allow only tax paid in their own countries to generate imputation credits, and only resident companies to pass on imputation credits to their shareholders.

This means that Australian companies pay tax in New Zealand but cannot provide imputation credits to their New Zealand shareholders, so they are effectively taxed twice on the same income.

Likewise, New Zealand companies pay tax in Australia but cannot provide franking credits to their Australian shareholders, who are also taxed twice as a result.

This is a problem that obviously requires a bilateral solution -- one that preserves the tax bases of both countries and is acceptable to government and business in both countries.

To that end, New Zealand and Australian officials have been discussing triangular taxation, and I have been in correspondence with Peter Costello about the matter.

I am happy to report that we have agreed that our officials will develop a mechanism for relieving affected Australian and New Zealand investors.

The final agreement of the two governments to such a mechanism is subject, of course, to its benefits outweighing its costs before it can be considered for implementation.

We have further agreed that the mechanism should be one that allocates both franking and imputation credits to shareholders in proportion to their shareholding of the company, a mechanism known as pro rata allocation.

Obviously, however, imputation credits will be useful only to New Zealand shareholders, and franking credits will be useful only to Australian shareholders.

This approach effectively eliminates the double taxation of those affected in triangular cases.

The next step is to consult widely with Australian and New Zealand business, by means of a joint Australia/New Zealand issues paper that will set out the proposed mechanism and seek submissions on detailed proposals. If all goes well, the issues paper should be ready for publication by the end of the year.

This is an extract from a speech Finance Minister Michael Cullen gave to the Deloittes's Tax Update Seminar.

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